If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Question

Quizplus · Accepted Answer

According to put-call parity, the premium of a put option should be equal to the premium of a call option plus the present value of the strike price minus the underlying asset price. If the actual put option premium is less than what is suggested by put-call parity, then an investor can buy the put option, sell the call option, and buy the underlying asset. This will result in a risk-free profit, eliminating the price discrepancy. Therefore, arbitrage can be conducted.

If an Actual Put Option Premium Is Less Than What